June 22, 2010 / 12:06 PM / 9 years ago

Petrobras shareholders OK massive stock issue

RIO DE JANEIRO (Reuters) - Brazilian state oil company Petrobras won shareholder approval on Tuesday for one of the world’s largest stock offerings, which will finance ambitious plans to pump billions of barrels of oil from deep beneath the ocean floor.

The vote paves the way for Petrobras (PETR4.SA)(PETR3.SA) to issue as much as 150 billion reais ($84 billion) of new stock that has become the cornerstone of a plan to turn the country into a major energy exporter.

But investors are still worried about uncertainties clouding the transaction, in which the government will receive shares in return for giving Petrobras access to up to 5 billion barrels of offshore oil while minority shareholders will pay cash for stock.

Petrobras has not determined the number of shares to be offered and has not provided the estimated value of the oil to be used in the swap — the crucial next step in the process that will be key for investors to evaluate the offer.

“The capitalization is necessary to improve Petrobras’ financial muscle, protect its credit metrics and pay the federal government for the oil transfer rights,” the government said in a note read at the assembly.

Brazil’s federal government, which controls 56 percent of the firm’s voting shares but only 32 percent of the total shares, rolled over minority shareholders’ protests to increase the limit on the number of shares the company can issue in order to accommodate the enormous offer.

Petrobras’ preferred or non-voting shares (PETR4.SA), the most widely traded class of the stock, slumped slightly following the news to close down about 1 percent at 29.11 reais per share.

In further signs of uncertainty, Brazil’s ANP energy regulator said on Tuesday it had hired an agency to determine the value of the barrels and would likely finish the estimate by late August — casting doubt on Petrobras’ expectation of launching the offer by July.

The approval hands a swift victory to President Luiz Inacio Lula da Silva in his bid to assert greater state control over Brazil’s newly discovered oil wealth and use Petrobras (PBR.N) as a tool to make the country a global powerhouse.

The capitalization plan further cements Brazil’s determination to push ahead with the development of deep-water oil reserves that are seen as key to economic development, despite growing skepticism about offshore drilling sparked by BP’s massive Gulf of Mexico oil spill.

Petrobras has the world’s largest exploration and production investment budget for 2010 and is the world’s leader in deep water offshore operations.

MINORITY PROTEST

“We strongly disagree with the terms that are being put forward to markets for this transaction,” said Jorge Luiz Santos, an individual shareholder who added all his stock holdings are represented in Petrobras shares.

Another unnamed shareholder said the company “is forcing minorities to subscribe more shares than necessary to carry out this plan.”

The plan “increases the government’s ability to intervene in the company’s investment decisions,” Erasto Almeida, an analyst at New York-based political risk firm Eurasia Group, wrote in a note. “Such a trade-off and policy trend is inherent within Petrobras’s new capital expenditure plan.”

The government’s majority control of voting shares in Petrobras, a former state monopoly partially privatized in 1997, allows it control corporate decision-making even though some 58 percent of the total capital is in the hands of private investors including holders of American Depository Receipts.

Brazil’s BNDES development bank and Brazil’s Federal Severance Fund hold an additional 9.9 percent.

MASSIVE OFFSHORE PLAN

Replenishing Petrobras’ capital base is crucial for the company’s $224 billion five-year investment plan, which focuses on developing the subsalt region, an area deep beneath the ocean floor under a thick layer of salt that may hold 50 billion barrels of oil, according to industry estimates.

The company could attract up to $25 billion from minority shareholders, while gaining access to as much as 5 billion barrels of crude that will likely include oil from the subsalt region, one of the world’s biggest discoveries in the last decade.

“I call on everyone here to pass the plan because Petrobras has an outstanding track record and the capacity to pull this off,” shareholder Ralf Azevedo told the assembly moments before Chief Executive Jose Sergio Gabrielli opened the ballot.

The approval hands a victory to Petrobras management, which has for months struggled to push forward the complex operation and ensure it can launch the share offer in July, before capital markets slow down for summer vacation in the northern hemisphere.

Gabrielli’s background looks appropriate for the task at hand. The former economics professor received a PhD from Boston University in 1988 for research on financing state enterprises during Brazil’s military dictatorship and what alternative mechanisms could have been used.

Editing by Todd Benson, Gerald E. McCormick, Andre Grenon and Sofina Mirza-Reid

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